'Albatross': St. Paul finds big dreams for ex-Macy's site won't fly

St. Paul city leaders bought the old Macy's building last year hoping to land a splashy project for the site. There was talk of a high-end downtown office tower or maybe a Target.

But in the 18 months the city's development arm has owned the abandoned department store, St. Paul has repeatedly scaled back its ambitions. Internal documents show builders panned the tower idea. Target deemed the location unprofitable, and a developer city officials were courting has cooled on the project.

Port Authority officials are trying now to salvage a plan to renovate the existing structure. The $30 million proposal presented to Frauenshuh Health Care Real Estate Solutions in February included an expanded Walgreens store, a Minnesota Wild practice rink, a fitness center and medical office space.

As recently as late April, the deal appeared imminent, according to Port Authority emails MPR News obtained through an open records request.

"The albatross may be leaving the nest!" Port Authority Vice President Monte Hilleman declared in an email to colleagues at the League of Minnesota Cities.

The Frauenshuh deal, however, has since fallen apart, leaving city officials once again to pick up the pieces and tally the costs of holding out for a signature project. Each month the 360,000 square foot building goes unsold costs the taxpayer-funded St. Paul Port Authority tens of thousands of dollars in new expenses.

The Port hasn't given up on Frauenshuh altogether but officials say talks have since broken off.

"The Macy's building is a challenging building, and they (Frauenshuh) may have decided that it is not in their sweet spot," Port President Louis Jambois said in a recent interview with MPR News. He acknowledged the building has also proved more challenging than expected. His current goal is to reach a deal to redevelop it by the end of the year.

The building opened as a Dayton's department store in 1963. It became a Marshall Field's and then a Macy's before it closed in early 2013, a victim of changing retail habits that took shoppers out of cities and into the suburbs.

St. Paul, which once boasted eight department stores, has struggled more than Minneapolis to attract retail and development to its downtown. Macy's shut its St. Paul doors in March 2013, leaving downtown with no major retailer.

Early on, it seemed the building's next chapter would start quickly. Two private investment groups made bids for the Macy's building even before the Port Authority stepped in.

Michael Marinovich, a Minneapolis-based commercial real estate broker, wanted to convert most of the building into a parking ramp, with a few small retail tenants and 60,000 square feet of office space earmarked for employees who work with the Department of Human Services' sex offender treatment program.

City officials, however, weren't interested. Mayor Chris Coleman wanted to prevent the building from being converted into a giant parking ramp or a low-end retail store. Notes from a 2013 meeting described the city's worst-case scenario as a "Burlington Coat Factory-type" retailer.

In a 2013 email sent on behalf of Coleman, then-Planning and Economic Development Director Cecile Bedor wrote that "[ Marinovich's] vision is the antithesis of ours, and makes us all question the commitment Macy's made to the city ensuring a quality redevelopment."

Coleman initially favored demolishing the building to make way for an upscale office tower. Port Authority marketing materials show a 30-story building on the Macy's site, rivaling the adjacent Wells Fargo tower. But the $13 million dollar price tag for demolition proved prohibitively expensive.

"I think any mayor would like to see a 50-story office tower on that site, wouldn't they? The math just doesn't work," Marinovich said in an interview. "What we thought worked was parking."

Marinovich says he withdrew his offer to buy the building because of the mayor's opposition.

The reason it's been difficult to find a buyer willing to invest big money to overhaul the building is the overall lack of demand for real estate in downtown St. Paul, he said. "Macy's is gone because Macy's couldn't make their sales volumes."

City Center Realty Partners, a San Francisco-based retail investment group, also considered buying the building before the Port stepped in. The reasons it withdrew its offer remain unclear.

The St. Paul Port Authority purchased the building for $3 million at the request of Mayor Chris Coleman.

Officials decided to pursue Walgreens only after Target passed on the site. Target cited the "fragmented residential population" in downtown St. Paul, high 18-percent office vacancy rate and lack of traffic outside of the work day.

"We have a duty to our shareholders to build profitable stores," Target Regional Real Estate Manager Perry Hite wrote in a November email.

Later that week, Jambois broke the news to Ecolab CEO Doug Baker, who had led a mayoral taskforce on downtown development, including the Macy's building near his company headquarters. Jambois acknowledged Target would have provided "more sizzle" to the development, but he noted Walgreens would "pay more in rent and lease the space for a longer term."

Walgreens already has a store in downtown St. Paul, across the street from the Macy's building. But the new proposed store would be five times the size. Jambois said it would resemble Walgreens' flagship store in Chicago.

Walgreens has been trying to overhaul its image in recent years. It has renovated 750 locations as part of its "Well Experience" initiative. The new stores feature modern designs with more fresh food and beauty products. The company's 14 flagship locations have additional amenities. Some even include sushi bars.

But some downtown St. Paul office workers strolling down the 7th Place pedestrian mall during a recent lunch hour were unimpressed by the idea of a bigger, better Walgreens.

"I don't usually go to a pharmacy, unless I'm needing medicine," said Heather Gomez, who works in the Securian building. "It's not an everyday thing I'd go to."

Port Authority officials did their own unscientific survey at the Wabasha Block Party last year. They asked people what they wanted to see at the Macy's building. The No. 1 response was a Target store. A few mentioned Walmart or Herbergers. No one suggested Walgreens.

The Port Authority planned to sell the building by last August because it wanted to avoid the significant costs of maintaining and marketing the cavernous structure. It's spent about $1.2 million so far, and costs continue to climb by more than $40,000 a month on average, even after factoring in revenue from the building's parking ramp, which remains in operation.

Other major expenses loom. According to internal documents, city safety inspectors have been pressuring the Port to complete an expensive upgrade of the elevators in the ramp to comply with state building codes passed in 2007.

Schindler Elevator Corp. told the Port in May that bringing the three elevators up to code would cost nearly $300,000. The St. Paul Department of Safety and Inspections has given the Port a July 3 deadline to come up a plan for completing the improvements.

Coleman's office declined to make him available for an interview.

"The mayor remains bullish on the prospects for the Macy's site, and we know there's significant interest," spokesman Tonya Tennessen said in a written statement. "We trust the Port Authority to negotiate what is best for the project."

The $30 million renovation proposal presented to Frauenshuh Health Care Real Estate Solutions in February would have replaced the building's drab beige bricks with a glassy new exterior. In addition to Walgreens and a practice rink for the Minnesota Wild, plans also called for a fitness center and medical office space. The proposal also included $460,000 in annual property tax breaks called tax increment financing.

All of that remains in limbo.

The Minnesota Wild are still interested in building an enclosed practice rink on the building's roof. Jambois, however, says the team won't sign on unless there's an overall development plan.

The Port Authority Board voted Tuesday to transfer the Macy's building to its nonprofit subsidiary, Capital City Properties. The move will make it easier to structure a redevelopment deal in which the public maintains part-ownership of the building long-term, something that was included in a proposed term sheet with Frauenshuh.

Jambois believes a two-story Walgreens can still be the cornerstone of a Macy's building revival.

"We think this is a great win," Jambois said. "If we wind up with an urban-scale convenience-based retailer, we think that's just a home run."

MPR News' Josh Marcus contributed to this report.